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Eye on the Fed

Can Ben Bernanke, Like John Roberts, Ignore Political Pressure and Do His Job?

In congressional testimony this week, the Republican Fed chairman could hold out the possibility of monetary easing that might spur a pickup before November, or Fed intervention to push job creation—even though either would be bad for Romney, who has built his campaign around economic misfortune.

07.17.12 8:45 AM ET

The Bush financial collapse of 2008 sealed the election of Barack Obama. Despite the apparent doldrums of recent months and predictions of doom or increasing danger for the now-incumbent president, an unexpected pickup in the recovery may yet leave Mitt Romney high and dry as a rising tide lifts growth and job creation in the final months carries Obama to a second term.

You won’t know that after listening to Federal Reserve chairman Ben Bernanke's testimony to a Senate committee on Tuesday and its House counterpart on Wednesday—that is, unless you were listening very closely.

First, Bernanke will sound his usual if urgent warnings. Congress needs to use the fiscal tools—short- and medium-term actions to sustain growth—that currently are in the death grip of a Republican Party intent on victory through policy paralysis and economic stagnation. Bernanke can’t ever say it that bluntly; he would be denounced as political if he plainly called out the GOP’s politicization of economics. But that will be the inescapable implication of his critique.

Beyond this, Bernanke has to warn about the dangers of the “fiscal cliff”—the automatic spending cuts and tax increases scheduled for the end of the year that could drain demand and spark another downturn. Republicans and Democrats alike do worry about this. And it’s hardly noted but ironically revealing that here the GOP seems to accept the Keynesian view—the capacity of government budgeting to spur or slow the economy—even as the party explicitly insists on the twin holy grails of higher Pentagon spending and lower tax rates on the highest incomes.

The president has offered a way back from the fiscal cliff, including an extension of the Bush tax cuts for the 98 percent of Americans who make less than $250,000 per year. Some congressional Democrats prefer to draw the line at a million a year. Never mind, though: the GOP refuses any compromise that doesn’t lavish the most on those who already have the most. As David Stockman, Ronald Reagan’s budget director, infamously and inconveniently phrased it in the early 1980s, this kind of kowtowing to the wealthy ultimately comes down to the unedifying sight of “the pigs feeding at the trough.”

In truth, whether the issue is the fiscal cliff looming after the election or the pace of job creation leading up to November, this Congress won’t move before the votes are cast and counted. Capitol Hill Republicans have signed on to—indeed they invented—the Romney referendum strategy: Don’t look too closely at what we’re for or what we’ve done; if you’re unhappy with economic conditions, you might as well take a chance on us. It’s the most nakedly reductionist summons—or more accurately, semi-whimper—in the annals of modern presidential campaigns.

This is where the close listening comes in. Given the fiscal deadlock, Bernanke has to hold out the possibility of further and far-reaching monetary easing. He won’t commit to it now, but at any time the Fed could turn to the third round of quantitative easing, QE3—which, simply put, means that the central bank increases the money supply by buying up assets from financial institutions, and crediting the sellers, thereby raising the reserves available for banks to lend and borrowers to invest. In 2010, according to Harvard economist Martin Feldstein, the chairman of Reagan’s Council of Economic Advisers, QE2 “very plausibl[y]” was responsible for “the stock market rise” and the “boost to consumer spending.” Feldstein correctly warned that rebound would flatten out in 2011 because quantitative easing was scheduled to end.

But it can be resumed—although the Fed might not act, for either economic or political reasons.

Economically, there are signs and predictions that in the third quarter—the politically determinative months of 2012—“jobs and growth numbers will track up modestly.” Or maybe more than modestly. Last week, new claims for unemployment benefits were well below expectations, at the lowest level in four years. In June, the auto industry that Romney would have consigned to a scrap heap of manufacturing history racked up a 22 percent increase in sales.

On the bleaker side of the ledger are last month’s disappointing job numbers. But Mark Zandi, an adviser to John McCain in 2008 and now Moody’s chief economist, told The New York Times: “I do think the economy is stronger than [some of] the recent data would suggest ... We’ve had the numbers say underlying job growth is at 80,000 jobs a month where we could see 150,000 jobs a month. Or GDP at 2 percent, where it’s really at 2.5 percent. That will become evident later in the year.”

Say—by October or November? If so, Romney’s in a world of hurt because economic distress is his bet, his hope, and virtually his whole message. And what will matter here is not whether the recovery is complete, but whether people perceive that things are shifting onto the right track. Remember Ronald Reagan, who romped to victory on a “Morning in America” when people thought the unemployment rate had declined from a recession-high level of 10.8 percent to 7.4 percent. Obama won’t have a rate that low—but the relevant metric is the sense of direction, not the absolute number.

Alternatively, if the pickup doesn’t materialize or if it flags—job creation falls short again in July—the Fed’s intervention could make the difference. The overall effects of QE3 wouldn’t be felt immediately; such action takes months to work its way through the economy. But the psychological impact on market expectations and hiring would be a real and present game-changer, pointing to increasing demand and therefore making it safer, indeed imperative, to hire more workers so that more products will be there for more consumers to buy. In fact, that’s what happened with QE2.

The question then, the potentially decisive question, could be whether the Fed moves quickly—whether Bernanke has the courage to pull a John Roberts—to ignore the political pressures and fulfill his duty under the law. Put aside an invincibly ignorant Rick Perry or the antediluvian Ron Paul, who would abolish the Fed altogether. Bernanke, himself a Republican, has aroused a storm of Republican animosity for what he’s already done. The GOP isn’t subtle here; contemplate this February report, incredible on its face, but not incredible for a party rooting for recession: “Congressional Republicans criticize the Federal Reserve ... for working to reduce unemployment.”

The criticism has now risen to a preemptive level: The Fed shouldn’t do anything more because that would represent political interference in an election season. And that is precisely the opposite of the case. The Fed is not supposed to count the days until the voting, but to execute the congressional mandate for monetary policy—“maximum employment, stable prices, and moderate long-term interest rates”—without regard to the rhythms of the campaign trail. At this point, there’s no risk of inflation; interest rates, to say the least, are “moderate.” Priority is undeniably job creation—and the law doesn’t grant the Fed a political holiday.

The Obama stimulus averted a depression; the Federal Reserve stepped in when an addled GOP House drank deeply from the tea of economic delusion and blocked other additional measures for jobs and growth. The ideology of inaction also advanced the cold calculation of Republican leaders that economically the worst for America was politically the best for them. In the end, they may fail at this contrivance—for Bernanke may frustrate them, as Chief Justice Roberts did, simply by doing his job.

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Either outcome appears more than plausible, and Obama may actually be able to run on a decidedly more upbeat path through the fall. But from the start, the president and his strategists have never banked on that or simply left themselves at the mercy of events. Against Romney’s one-dimensional definition of 2012 as a referendum, they prepared for the contingency of economic disappointment by casting the election as a populist choice between a candidate of privilege and a president fighting for ordinary people. As the polling numbers confounded the doubters in Obama’s own party, his campaign doubled down on the attacks that began with Romney’s job-destroying profiteering at Bain. The Republican candidate, forced off-message, is suddenly and manifestly on the defensive. As he debates whether he lied about when he left Bain, he’s under fire on multiple fronts—offshoring, Swiss bank accounts, tax havens in the Caribbean, his refusal to release 10 years of his taxes because there probably were years when he didn’t pay any.

Romney and his advisers resisted, they waited; finally they have had to respond—and the pressures will be unrelenting. Last Sunday, even prominent Republican figures said he had to release his tax returns—or suggested that otherwise he had something to hide. The Obama campaign is setting the terms of the race: The president keeps his job if the job numbers noticeably improve; he has another way to win if the results are sluggish or mixed. In contrast, the Romney strategists put all its chips on economic bad news; they’re desperate to return to the 2012 race as a referendum on economic disaffection. They should be careful what they wish for. By the time they get there, if they ever do, there may be a lot less to say.

There is a clear relationship between presidential preference and “income growth during election years ... [T]he second and third quarters matter most.” And George Washington University professor John Sides reinforces the lesson of 1984 and refutes the notion that an upswing at the end of the political cycle can’t redeem preceding hard times: “What voters are looking at is whether things are getting better or worse.”

All this should keep Mitt Romney up at night. He’s made himself a hostage to economic misfortune. While even that might not salvage a candidacy plagued and pounded for other weaknesses, he appears to have no Plan B to handle a less dismal, late-brightening picture on jobs and growth.

It’s not important whether that’s already on the way or helped along by a Roberts-like Bernanke. If it comes, then come November, we and a lot of his fellow Republicans will conclude: Mitt, you were stupid to think it was just the economy.